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Hornby's financial updates to the Stock Market


Mel_H
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Hornby has posted the statement below to the Stock Market this morning at 0701hrs when the market opened.

 

Although called a 'trading update' it is, in effect, a profits warning, which it is required to make if trading changes from previous market statements it made.

 

The Stock Market hasn't reacted well, and the share price fell by 40% (down 32p) to trade at 48.5p by 0900hrs this morning (10 February 2016). The price might recover later in the day.

 

Please remember that Hornby also includes other divisions other than model railways (e.g Corgi) and that no other manufacturer is Stock Market listed, so does not have to give (and doesn't provide) any financial information.

 

On a personal note, I'm not surprised about the results of the stock take, given that some items shown as 'in stock' online, turn out not to be on Hornby.com. When I suggested a stock take (around Christmas), a reply came back saying this had been done.

 

I, and I hope everyone on this forum, wish Hornby well, and that product supplies and model development is not unduly affected by this. Hornby - we need you!

 

---------------------------------------------

 

 

HRN   
Update on Trading and Transformation Plan
Released 07:00 10-Feb-2016

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RNS Number : 5857O
Hornby PLC
10 February 2016

 

UPDATE ON TRADING AND TRANSFORMATION PLAN

 

Hornby Plc ("Hornby"), the international hobby products group, is updating shareholders on progress made so far in its turnaround strategy.  

 

The Group has made significant progress in implementing changes to its business model to modernise product sourcing, improve management of the supply chain, upgrade the logistics, warehousing, stock control processes and accelerate the distribution routes to customers.  This, together with the rollout of the new ERP system, has required major investment and resulted in disruption which has had a significant impact on the trading performance of the business, as previously disclosed on 8th December last year.

 

UK Trading

 

In the UK the Group saw a strong sales performance in the key November and December period as sales opportunities were maximised in the run up to Christmas. Like for like sales in this period were up 17% overall year on year, though this masks some volatility within the period. However, subsequent trading since the start of the New Year has been in stark contrast, with a disappointing response to January product promotions combined with poor underlying sales resulting in negative year on year revenue growth and sales for the month being substantially below expectations. While we are expecting performance in February and March to improve on January, it will not reach previously anticipated levels. 

 

International Trading 

 

As disclosed at our interims, there has been a significant reorganisation of the management and distribution operations of the European subsidiaries.  The impact of this has been that trading in the international businesses was disrupted last autumn as the restructuring took place.  Hornby is now through the main period of major disruption.  Improved sales in the last two months have reflected the changes that have been made to the logistics, stock handling and distribution operations and like-for-like sales across December and January combined were up 5%. Despite this being the first positive like for like sales performance this financial year, this is still significantly behind the Board's previous expectations.  

 

Financial Performance

 

The Group now expects to report a substantially wider trading loss than previously forecast in this current financial year.  The team has also conducted a full stock take at the Group's consolidated  warehouse in Hersden and a balance sheet review following the reorganisation of the European subsidiaries which will result in a £1.0m write off.  The disappointing sales performance experienced in the New Year is expected to result in a trading profit deterioration of between £2.5m - £3.0m, with approximately half due to UK performance. In total the Group is now expecting to report an underlying loss before tax in the range of £5.5m - £6.0m, which represents a substantial setback in our recovery plan for the business. 

 

As a result the Directors consider there to be a risk that the Group will breach a covenant of their banking facility in March 2016. The Group has enjoyed a long and supportive relationship with its lender, with whom it is currently in discussions. 

 

The Directors are continuing to execute the Group's turnaround strategy.  At the same time, the Board is now analysing the causes and consequences arising from this poor start to the new calendar year. We will update the market on the Board's progress and our revised expectations for the financial outlook for the business in due course. 

 

Richard Ames, Chief Executive of Hornby commented,

 

"This has been a real year of change at Hornby.  Undoubtedly this is a disappointing result, but we have a strong portfolio of brands that we are determined to see flourish.  

 

"The feedback from customers at the recent International Toy Fairs was encouraging and we are facing the future where, with the right platform, we can build value for our shareholders and drive the Group's recovery."

 

---------------ENDS--------------

Edited by Mel_H
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Unfortunately, that reads like there's a serious risk that it might be curtains for Hornby, in its present form.

The banks will look seriously at future prospects, before agreeing to further restructuring of the debts.

Those prospects don't look too bright.

 

 

 

.

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Market forces is not an area I'm qualified to discuss on a soap-box.  But that statement is worrying and in a sense alarming.  Something would seem to be still clearly amiss in the overall organisation and the fact that the UK results for January have nose-dived certainly doesn't bode well.  One month, like swallows and summers, doesn't make or break a business the size of Hornby very often but they sound as though they can ill afford to have another like it.

 

Breach of loan covenant is tantamount to losing all financial credibility and standing.  I suspect no-one will support them if that happens.  They will be burning midnight oil to ensure that it doesn't but unless there's money coming in to balance that going out the options may be few.

 

Much has been said regards Hornby UK's terms of trade.  One wonders whether a certain species of bird isn't coming home to it's overnight perching-place.

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I think a major concern would be the write-off of £1million of stock as a result of the stock take. When was the last one done? They ought to be annually at least.

 

The increase in sales just before christmas is good news, yet the big drop in January seems to have affected them badly. Were suppliers bringing forward sales?

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No surprise here.

 

All my 2015 Hornby purchases ended up in the bargain basement, back to the original prices they were promised at, after being massively increased when first released - prices I was foolish enough to pay even though "discounted" to the maximum permitted..

 

I am now sitting on my hands over the 2016 releases until the price freeze periods end and the true market prices reveal themselves. I'm not getting caught again.

 

I supect many others are doing the same.

 

Hornby needs to treat its UK customers a whole lot better than this.

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Market forces is not an area I'm qualified to discuss on a soap-box.  But that statement is worrying and in a sense alarming.  Something would seem to be still clearly amiss in the overall organisation and the fact that the UK results for January have nose-dived certainly doesn't bode well.  One month, like swallows and summers, doesn't make or break a business the size of Hornby very often but they sound as though they can ill afford to have another like it.

 

Breach of loan covenant is tantamount to losing all financial credibility and standing.  I suspect no-one will support them if that happens.  They will be burning midnight oil to ensure that it doesn't but unless there's money coming in to balance that going out the options may be few.

 

Much has been said regards Hornby UK's terms of trade.  One wonders whether a certain species of bird isn't coming home to it's overnight perching-place.

In terms of breaching a loan covenant, you're right it's clearly a massive credibility issue. However, when banks set covenants their philosophy is to try and set the level so as they can step in and negotiate with management before the company's position has become terminal. Don't forget that lenders don't get any upside just their money back plus interest if all goes well. On the downside,they can lose all of their loan. It takes a lot of margin income to make up for the loss of principal...

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Well I for one am surprised. Hornby railways seemed to be firing on all cylinders this last year, with the K1, J15, D16/3, J50, King, Drummond 700, S15 and Crosti all coming to market. That is an unprecedented number of new locomotive models from one manufacturer in a year.

 

I would have fervently hoped this translated into a decent level of profit, for ploughing into this and next year's new models.

 

John

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Well I for one am surprised. Hornby railways seemed to be firing on all cylinders this last year, with the K1, J15, D16/3, J50, King, Drummond 700, S15 and Crosti all coming to market. That is an unprecedented number of new locomotive models from one manufacturer in a year.

 

I would have fervently hoped this translated into a decent level of profit, for ploughing into this and next year's new models.

 

John

 

They are not selling at the prices Hornby are currently asking, John.

Look at the bargain lists of all the well-known retailers.

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Well I for one am surprised. Hornby railways seemed to be firing on all cylinders this last year, with the K1, J15, D16/3, J50, King, Drummond 700, S15 and Crosti all coming to market. That is an unprecedented number of new locomotive models from one manufacturer in a year.

I would have fervently hoped this translated into a decent level of profit, for ploughing into this and next year's new models.

John

Only if they sell sufficient and income is more than costs. Clearly they are not selling enough. Probably a combination of wrong choice, quantity and quality of product.

 

G.

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You have to remember that Hornby has lots of different brands under one company. When they issue reports like this, is it the scalelectric, humbrol, air fix or the uk/continental trains that are performing poorly.

Agreed and as I've argued elsewhere they do not provide external parties with sufficient information to analyse which brand is struggling...

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You have to remember that Hornby has lots of different brands under one company. When they issue reports like this, is it the scalelectric, humbrol, air fix or the uk/continental trains that are performing poorly.

 

The management.

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I suspect an element of this is down to how the trade has been treated over the last few years. (though things appear to be changing lately)

 

Cut margins, whack-up prices.

Push direct selling, with discounts that make it difficult for independents to compete given the reduced margins

draw down on sales reps and their support (I can't remember when i last saw a rep)

 

The real issues began with the massive discounting online - selling direct for less than cost (Which Dapol now seem to be doing as well)

 

One other key mistake was dumping lots of items to the trade last year.  Significant discounts on major lines, many of which were 2015 items.  Retailers who had been stretched by the price increases couldn't capitalise on this, and couldn't sell existing stocks of those lines because of the crash in market value.

 

They've done a "Black Friday"  Everyone is now waiting for the inevitable discounts instead of placing solid orders and buying in a regular fashion.

 

 

But simply, the products are too expensive.

 

 I've said this before - a major restructure of pricing is required, particularly for accessories, where economies of scale can work to their benefit.   Why should anyone pay more than £1.50 for a plastic platform section? (Current list is £4.99)   At £1.50 I'd sell hundreds, instead of a few dozen a year and we'd all make more money.

Scalextric cars at £40, when a higher spec toy car or remote control car can be had for £25 or less.

 

Cut prices, make the hobby more accessible, look after those that sell your products (Instead of competing and strangling them) and see things change

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Given the wider market turmoil this is not the best time to make such an announcement.  Also, their bank is Barclays who have a few issues of their own at present.  I struggle to see how a predicted £2 million loss could turn in to £5-6 million in a couple of months.  If they still own the old factory site then I suppose they could sell that to help plug the gap in the short term?  Very sad to see and I am sure there a lot of worried people at Hornby.

 

Paddy

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I think part of the problem is Hornby is now sexy asset management company. The only asset it has left are the tooling, which it seems to be rapidly shipping to china (good luck trying to get it back if things go belly up), property (or have they sold off al this?), and the various brand names it owns. It is a company held at risk by other companies that actually do the work for them, without the means to cut back on costs when things are tough, as they are tied into contracts with the other companies.

 

Does anybody remember the other stock market sexy asset management company, that contracted everything out and was just supposed to sit back and collect profits for its shareholders? I think it was called rail track.

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Coming from a tax audit background in my previous career, I was concerned to hear from my local Hornby retailer a couple of weeks ago, that he had received a large amount of stock from Hornby, that he hadn't ordered and which he had been invoiced for, so clearly not a delivery error. His attempts with Hornby accounts to find out why this had happened were met with 'reps error' as the main excuse. Due to the then warehouse closure, he could not arrange for the excess goods to be returned until the warehouse re-opened.

I wondered at the time if this was a way of reducing stock and increasing sales at the end of an accounting period, as I'd seen this happen in other businesses in my audit career. The goods then come back into stock after the stocktake as returns and credit notes are issued for the accounting. This is only info from one retailer, so it would be unwise to treat this as a widespread issue, but other retailer members could indicate if similar issues occurred before the stocktake.

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If the worst did happen it is hard to see who would buy Hornby as a going concern.  Bachmann may be interested in acquiring Hornby's collection of brands but I can't see them keeping the company going.  If this did happen then the process would no doubt be similar to their purchase of Graham Farish.  Whilst the loss of competition from the market would be sad it may give Bachmann the economies of scale needed to stabilise prices in the UK market.

 

Paddy

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It would be interesting to see which areas of the company are failing - it can't be company-wide, I would assume. I personally doubt the company would collapse as a whole, but the covenant could force it to sell individual businesses within the company.

 

The covenant is a binding agreement with its lender/s to operate within certain defined financial constraints. Failure to do this could allow the lender/s to force immediate repayment of outstanding debts or to sell assets (or businesses) within the company.

 

If the price falls below 32p I'm definitely buying - any decisions Hornby is reluctant to make would be made for them and a more healthy business would emerge, eventually.

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This has gloomy reminders for me of the situation that William Britains were in by the mid 1990's, when I worked for them as a sculptor / pattern maker and historical researcher.

 

The same attempts to sell direct, cutting back on margins and tighter terms for shops and dealers, and cut backs on reps.  Again all of their moulds were, understandably, in China, but they had no 'presence', let alone Chinese executives controlling things.  On one occasion we went to China only to find that not only had valuable moulds disappeared, but so had the factory!

 

The Chinese themselves will be taking careful stock of this situation, and it may be that packaging supply lines for instance, start wanting to be paid a portion 'up front', which is what happened to us.  With possibly more constrictions on credit, which happened to us, they may be faced with a very difficult situation.  

 

Inevitably the company failed and it was (the most profitable parts) taken over by 'Racing Champions' a U.S. firm which, to give them their due, re-established control quickly and immediately appointed a Chinese exec to oversee things.

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If Hornby do go the bigger affect is its gonna be incredibly harder to attract new blood into the hobby. I know this because most of the children I know want Hornby train sets. Giving them a Bachmann one wouldn't do as they wouldn't know what it was. It's the brand name most people outside the hobby know about.

 

Big james

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